Question 4

DriveTech plc is engaged in the business of designing and manufacturing high-performance

racing cars. It wishes to build a racetrack upon which it can test its prototype models and to

that end, it creates a subsidiary company called Track Build Ltd.

A suitable piece of land on which to build the testing track is located and Track Build purchases

it using capital borrowed from Drive Tech. However, shortly thereafter, the directors of Track

Build (all of whom are also directors of Drive Tech) discover that the land does not have

planning permission and soTrackBuild agrees to sell the land to BuildCorp Ltd, a local

construction company.

However, several days later, a member of the local council indicates to the directors of Track

Build that, should it apply for planning permission, it would certainly be granted. Accordingly,

before sale of the land to BuildCorp is completed, Track Build transfers ownership of the land

to DriveTech, and argues that the contract with BuildCorp is no longer valid as it no longer

owns the land. TrackBuild successfully applies for planning permission.

DriveTech decides that it wishes to expand into the consumer car market and to this end, it

created another subsidiary called GearShift Ltd. The Articles of GearShift provide that only

directors nominated by DriveTech may sit on its board and accordingly, all the directors of

GearShift are either persons nominated by DriveTech, or are actually also directors of

DriveTech. GearShift engages in research and development on a new car and this is funded

exclusively by issuing shares that are purchased by DriveTech (with the result that GearShift

becomes a wholly-owned subsidiary).

However, more capital is required, but the directors of DriveTech refuse to provide GearShift

with any more capital and instead order the board of GearShift to cut back on its research and

development. Accordingly, the directors of GearShift agree to cut back on research into the car's safety features. GearShift completes designing a new car and it is manufactured and sold to the public. However, the car turns out to be unsafe due to a defect in the car's brakes and numerous accidents occur. Those who suffered injury and loss due to the defective cars initiate proceedings against GearShift but, by this time, GearShift has entered insolvent liquidation, and has insufficient funds to meet any liability.

Advise the parties above, referencing Case Law, of any potential liability they might

face.