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06 July 2015
Under French law, a company has legal personality. In principle, a company is autonomous and independent, and is bound only by its own commitments.
Within a group of companies, this principle provides the basis for the legal independence of a subsidiary in relation to its parent company and the other companies within the group, and for the fact that a parent company cannot be held liable for the actions of its subsidiaries. This concept is similar to that of the corporate veil in common-law systems.
However, this principle has its limits. The courts and the legislature have reacted to the development of groups of companies, which are used to isolate risks in sometimes complex structures, by creating exceptions to the principle that a parent company is not liable for its subsidiary. The aim is to protect third parties which deal with the subsidiary.
Parent company liability can be incurred on the basis of tort under Article 1382 of the Civil Code. In recent years, case law has admitted parent company liability in the following situations:
To date, case law has not been clear on the criteria for establishing parent company liability. The courts proceed on the basis of an overall analysis of whether the behaviour of the parent company is wrongful rather than on the basis of clear criteria for establishing wrongful behaviour.
Nevertheless, in a February 3 2015 ruling(4) the Commercial Division of the Supreme Court adopted a more structured approach. In this case a company which had contracted with a subsidiary was unable to obtain payment of its invoices and brought proceedings against the parent company. The court ordered the parent to pay its subsidiary's invoices on the basis that the company had given the creditor the impression that it would step in for the subsidiary in the performance of the contract, in particular by intervening on several occasions during the pre-litigation stage in order to discuss the amount of the debt and in an attempt to reach a settlement.
The court laid down two conditions necessary to establish a parent company's liability for the actions of its subsidiaries:
This ruling clarifies the rules for establishing parent company liability and imposes conditions which limit the grounds on which parent companies can be held liable for their subsidiaries.(5)
Under insolvency law, groups of companies may be held liable if insolvency proceedings affect one of the group's subsidiaries. The courts can open judicial reorganisation or liquidation proceedings against a company in insolvency, but also against its parent company if the following criteria are satisfied:
Under competition law, the French and European competition authorities presume that the anti-competitive activities of wholly or almost wholly owned subsidiaries are attributable to the parent company.(6) As a result of this presumption, the parent company may be held liable for the payment of fines imposed on the subsidiary. This presumption, which pierces the corporate veil, can be explained by the fact that competition law construes a 'business' as being an economic unit and not a legal entity.
In employment law, the principle of corporate autonomy has been challenged by the concept of 'co-employment', which makes the parent company liable for redundancies carried out by its subsidiaries.
The courts consider that if two companies in the same group share the same interests, activities and management, both companies are co-employees of the subsidiary's employees and both are jointly liable as co-employer.(7)
Since 2010 a 'parent company' within the meaning of Article L233-1 of the Commercial Code (ie, one that holds at least half of its subsidiary's capital) may be held liable, under certain conditions, for the financing of the decommissioning of classified facilities of its subsidiary if it is in judicial liquidation.(8) In particular, the parent company must have engaged in wrongdoing that has contributed to the shortfall in its subsidiary's assets.
The liability of a parent company for the actions of its subsidiary does not arise automatically as soon as the parent gets involved. However, the risk of liability should always be considered before setting a strategy to assist a subsidiary. Parent companies should tread carefully.
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00) or email (firstname.lastname@example.org or email@example.com). The Cabinet Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com).
(5) This follows on from a recent ruling of the Supreme Court in which a parent company's tortious liability was not upheld for the actions of its subsidiary in that the interference by the parent company was not likely to create a misleading impression for the other contracting party (Sup Court, Com Div, June 12 2012, no 11-16.109).
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