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My counterpart is insolvent, but its parent lives on – is there nothing I can do?

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It is not uncommon for contractors, in several industry sectors, to contract with a special purpose vehicle (SPV), whose day-to-day management is effectively controlled by a parent company, and the SPV has with little to no assets beyond cash flow provided by its parent. In this article we look at what a claimant could do outside of the traditional insolvency process in circumstances where the SPV goes into a form of external administration such as administration or liquidation and there are no assets available to the external administrators.

While recent Australian authorities have sought to limit a claim in negligence, other torts have existed that have not been so narrowly defined. In the absence of an applicable Australian authority and given the difficulties with establishing an insolvency-based claim (such as insolvent trading) in circumstances where the SPV has funding support from its parent or a related company,[1] we look to two overseas authorities for guidance.

These oversea authorities consider the ability to bring a claim in tort in a rather novel context and provide a useful means for a claimant, who many find themselves in a similar situation, to seek remedy against a solvent parent company.

What are economic torts?

In general terms, an economic tort is a cause of action concerning intentional conduct that causes injury to a claimant’s economic interest. Examples of recognised categories of economic tort concern actions of inducing a breach of contract, unlawful interference with trade or business, and unlawful means conspiracy which arises where an agreement between two or more persons to take action causes damage to another person.

Economic torts are distinct from a negligent cause of action because of the requirement to find an intent to injure. The subjective intention and knowledge of the offender is a key element to establish a proof of liability. Damages for tort are generally awarded to place the claimant in the same position it would have been had the tort not been committed.

The application of Palmer Birch[2] and Stocznia Gdansja[3]

To be successful in such a claim, the mental element of knowledge and intent must be established. That is, for the tort to apply so as to hold a non-contracting parent liable, the parent company must have some knowledge of the relevant contract and intended to interfere with that contract.  

Let’s consider the factual background in Palmer Birch and Stocznia Gdansja and how the claimants were successful in their respective claims for tort.

Palmer Birch

See for example Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) v Canstruct Pty Ltd [2024] FCAFC 141.

[2018] EWHC 2316 (TCC) (Palmer Birch).

[2002] 2 All ER (Comm) 768 (Stocznia Gdanska).

As to the facts:

  • Palmer Birch (Plaintiff), a construction contractor, entered into a building contract with Hillerdson House Limited (SPV). The SPV was a limited liability company newly established by the defendants (referred to here as D1 and D2).
  • As the project went on, D2 was not able to secure funds and SPV failed to pay the Plaintiff’s invoices. D2 was able to later secure funds to pay the Plaintiff. However, instead of transferring the amounts to SPV, D2 set aside the funds for a different company owned by D2. The different company was used to complete the works through a different contractor.
  • SPV later terminated the contract with the Plaintiff and went into voluntary liquidation. The Plaintiff commenced proceedings against D1 and D2 pursuing the economic torts alleging D1 and D2 induced the SPV to breach the contract and engaged in conspiracy to injure the Plaintiff by unlawful means.

As to the findings, the Technology and Construction Court (TCC) held:

  • D2 liable for inducing the SPV to breach the contract. The TCC found D2’s decision to divert funds from SPV, leading to its liquidation, and benefiting from the Plaintiff’s works and completing the works through a different company, crossed the line from ‘merely preventing’ the contract to inducing its breach.
  • D1 and D2 liable for conspiring to injure by unlawful means because they colluded to bring a repudiatory breach of the contract. The TCC found an implicit agreement existed between the D1 and D2 to put SPV into liquidation so SPV could escape from existing and anticipated claims brought by the Plaintiff while benefiting from the Plaintiff’s works.

The case highlights that where a contract has been breached for a lack of funds, a distinction must be drawn between preventing the contract and procuring a breach of contract by determining if the funds were merely withheld or diverted. Where money has been withheld for legitimate reasons, no liability would be attached for inducing a breach of contract. However, as established here, a diversion can constitute inducing a breach of contract.

Stocznia Gdansja

As to the facts:

  • The Latvian Shipping Company (Parent Company) negotiated for the manufacture and purchase of vessels from Stocznia (Plaintiff). The purchase of the vessels was made by Latreefers Inc (SPV), a company that was to be a wholly owned subsidiary of Latmar Holdings Corporation (Sub-Parent Company).
  • The SPV was incorporated prior to the manufacture and supply contracts being entered into. The SPV’s shares were held by the Sub-Parent Company and its directors were employees of Capco Trust (Isle of Man) Ltd (Capco). Capco and the Parent Company entered into a contract providing that the SPV would be “kept in sufficient funds by [the Parent Company] to honour its liabilities as and when they become due”.
  • The Plaintiff gave notices to the SPV that a 20% deposit was due for the first and second vessels. However, no payment was made. The Plaintiff proceeded to give notices of recission for those two contractors. A similar process occurred for the contracts for the third, fourth, fifth and sixth vessels. The Plaintiff brought a claim utilising the economic tort claim against the Parent Company on the basis that the Parent Company induced the SPV’s breach of contract.

As to the findings, on appeal the Court held:

  • The Parent Company liable for indirect inducement by unlawful means of the SPV’s breach of its contracts. The Court said that the tort is committed where “a defendant wrongly, … by unlawful means, withholds that which is necessary to another party to fulfil [its] contract with a claimant, and does so with the requisite knowledge of that contract and with the requisite intention”.
  • The Parent Company’s conduct of withholding funds, which was in breach of the contractual agreement with Capco to keep the SPV in “sufficient funds”, with the intent to cause the SPV to fail its performance of the contracts with the Plaintiff, entitled the Plaintiff to a remedy in tort.

The case illustrates the use of a tort against a parent company in a corporate group context. The practicality of the claim in this case is clear provided the sufficient intent and knowledge can be established. It allows the Plaintiff to go behind the insolvent SPV for a better funded outcome.

Key takeaways

Often there may be little a claimant can do in circumstances where the contracting counterparty has gone into external administration and has no assets available to satisfy creditor claims, beyond the usual proof of debt procedures. However, these cases may provide an alternate route for a claimant to have the ability to claim in tort against another party (such as its parent company) that sits behind the insolvent counterparty.

The key matter requiring strong proof is that that the other party knew the relevant contractual terms and played an active role in the decision to divert or withhold funds, and did so with the requisite knowledge and intent. In cases involving smaller corporate groups, the companies in the group may simply be the alter ego of a single individual who controls the entire group, allowing the knowledge of that individual to be imputed to each company in the group. In other cases, there will often be at least one common director between the SPV and the parent company to provide a basis for imputing the knowledge of the SPV to the parent company.

While a similar application of the economic torts has not yet occurred in an Australian jurisdiction, what appears from both cases is that, in the right context, a claim for tort can provide a potentially useful means by which a claimant may seek remedy against a solvent alternate defendant.

Reference

  • [1]

    See for example Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) v Canstruct Pty Ltd [2024] FCAFC 141.

  • [2]

    [2018] EWHC 2316 (TCC) (Palmer Birch).

  • [3]

    [2002] 2 All ER (Comm) 768 (Stocznia Gdanska).

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