During the Metaleurop case, Law 2003-699 of 30 July 2003, known as the "Bachelot Law", tried to resolve the problem of abandoned polluted sites, but the government authorities' inability to prevent company bankruptcies continued to feed the public sentiment that offenders were getting off scot-free. The Grenelle Environmental Forum (Grenelle de l’Environnement) marks an additional step towards "eco-liability"^[1] of parent companies and, through them, that of the group concerned. Indeed, the "Grenelle 2" Law 2010-788 of 12 July 2010 explicitly recognises, for the first time in French law, the possibility of transferring to parent companies the rehabilitation duty in relation to the pollution caused by the activities of their insolvent subsidiaries.

 

The idea of holding a parent company liable for the acts of its subsidiary, or even of personifying the group as a whole, is not new. But the principle of the legal autonomy of corporations precludes the possibility of compelling a parent company to assume the obligations of its failing subsidiary, and is protected by the courts which strictly uphold it.

As far as environmental obligations are concerned, this situation led to abuses that were all the more shocking for the public in that the bankrupt subsidiaries concerned were controlled by parent companies or groups that were perfectly solvent, whereas the rehabilitation obligation was limited in substance and duration. In the case of sites that were subject to the authorisation regime and that ceased operations before 1 October 2005 (Env. Code, art. R. 512-39-5), rehabilitation is limited to an industrial use. The same solution was recently applied to sites subject to the declaratory regime (Env. Code, art. R. 512-66-1-III). Since the important Alusuisse-Lonza France ruling returned by the Council of State on 8 July 2005 (CE, 8 juill. 2005, n° 247976), the duration of the obligation is limited to 30 years from the date on which the cessation of activities was declared to the authorities. Given this context, a reform of the industrial site rehabilitation regime that took account of company insolvency was inevitable.

 

Initially put forward in a Resolution of the Institute of International Law, the principle of parent company liability in environmental matters was established by the French legislator as an objective to be attained, with the aim of bringing it to the European level within the framework of the "Grenelle 1" Law of 3 August 2009.

 

The "Grenelle 2" Law 2010-788 of 12 July 2010 (Articles 90 and 227) enshrined in French law the notion of environmental liability of parent and grandparent companies for the insolvency of their subsidiaries.

In fact, the "Grenelle 2" Law reinstates article L. 512-17 of the Environmental Code which lays down a principle of parent company liability for its subsidiaries in relation to the rehabilitation of classified installations. Operators of classified installations are required to rehabilitate their sites if activities are discontinued. However, if the operator no longer exists or is insolvent, rehabilitation cannot take place, and the site will be abandoned even though its level of contamination may be harmful to the environment or to human health. These sites pose major redevelopment problems owing to the sometimes exorbitant costs of the environmental debt left to the future "acquirers", or even to the whole community.

Although it is clear that the "Grenelle 2" Law does not establish a general principle of environmental liability on the part of the parent company for the acts of its subsidiary, it nonetheless constitutes a significant development in French law in this area.

 

More ground is broken by article 90 of the Grenelle 2 Law relative to the new wind farm regime, which is now subject to the legislation on classified installations. Pursuant to its new wording, article L. 553-3 of the Environmental Code transfers in theory to parent companies the liability for rehabilitation in case of operator failure. The legislative text does not define the notion of parent company, nor that of failure, which suggests that the legislator did not intend to limit the mechanism to companies placed in compulsory liquidation, as is the case with article L. 512-17 referred to above.

 

Beyond the obvious reasons of opportuneness which may explain this inequality of treatment, one may limit oneself to observe that a new law of the liability of parent companies in relation to rehabilitation has emerged in France.

 

Following a review of the practical difficulties raised by the former law (I.), the challenges posed by the new mechanism for transferring the rehabilitation obligation arising from article L 512-17 of the Environmental Code will be addressed (II.).

 

I. - practical Difficulties relatING to the PREVIOUS rehabilitation obligation REGIME FOR JUSTIFYING A GOVERNMENT action with regard to parent companies

 

It is now acknowledged that the "operator" is the sole legal subject as far as classified installations are concerned. Ignoring, on principle, the private law ties between companies, this concept alone does not allow parent companies to be held liable (A.), and, at the same time, the government is confronted by other practical difficulties relating to rehabilitation control (B.).

 

A. - Limits of the notion of operator when seeking persons responsible for the rehabilitation of polluted sites and land

 

Under the law of classified installations, the "operator" alone is subject to the rehabilitation obligations. But the operator is traditionally defined by means of a material criterion relating to the operator's attachment to the activity (operational but not economic control) which, in theory, precludes any attempt to hold parent companies liable.

 

Notwithstanding constructive jurisprudential developments, the concept of operator comes up against a concept of economic control, which it does not take into account, with the result that parent companies and company groups cannot be compelled by the government to assume the financial cost of rehabilitation (CAA, Paris, 17 oct. 2003, n° 99PA03797, Société Fayolles et fils, Env. 2004, comm. 8, note Trouilly  P.; Env. 2004, CCT 12, II, Deharbe D. ;  RDI 2004, p. 433, comm. Trébulle F.- G0.). This represents a dead end for the administration, which has no choice but to turn to the liquidator, but the latter is often helpless when faced with a multitude of creditors.

 

For his part, the judge in the "Metaleurop Nord" case dismissed, citing the principle of corporate autonomy, the "extension of proceedings" action whereby the search for liability moves up vertically towards the parent company by the effect of the pooling of assets and liabilities (Cass. Com, 19 avr. 2005, n° 05-10.094, Bull. Civ. IV, n° 92 ; D. 2005, p. 216, obs. Lienhard A.; JCP E, n° 20, p. 796, note Rolland B. ; JCP G, 2005, II, 10088, note Bouru O., Menjucq M.).

Similarly, in the Montchanin Landfill case, the Court of Cassation found that the shareholder could not be held liable insofar as it had not committed a fault, and considered that "a parent company is not obliged to finance its subsidiary to allow the latter to fulfil its obligations even if that subsidiary is responsible for a public service which could constitute a risk for the general public" (Cass. Com., 26 mars 2008, n° 07-11.619 ; Env., août 2009, n° 8, chron. 2, Trébulle F.- G., n° 19 ; Act. Proc. Coll. 2008, comm. 231, note Fraimout J.-J; Rev. proc. coll., 2009, n° 6, comm. 183, Ruffié J.- Ph).

 

B. - Other practical difficulties arising from the rehabilitation regime

 

Other difficulties revolve around the debate on the concept of operator. The government is often too poorly informed or unqualified to involve itself in the running of companies in order to anticipate problems, and financial problems in particular.

 

Its control over operators' financial health is limited, even if notable developments can be seen in the texts in recent years, including via the mechanism of financial guarantees (Env. Code, art. L. 516-1 et seq.; Env. Code, art. R. 516-1 et seq.), which, in practice, are rendered partially ineffective in certain cases where they would have been particularly useful.

Other tools have led to progress, such as the control of operators' technical and financial capabilities, which prefectural authorities are required to exercise when examining every request for authorisation, the obligation to update the site pollution status whenever there is a significant change in the operating conditions of the most dangerous installations (Env. Code, Article L. 512-18), or the shareholder information mechanism in relation to the social and environmental consequences of listed companies contained in article L. 225-102-1 of the Commercial Code. But the effectiveness of these tools requires careful examination of each file by the authorities and relies, above all, on limited structural capacities which make it impossible to closely monitor operators over the life of the facility.

 

The administrative rehabilitation procedure can take a long time to implement. If a site closes down suddenly owing to operator bankruptcy, the outcome of the administrative procedure will be uncertain and, in any event, will only be effective if the land is not vacated and if the future use of the site is unknown.

 

The administration constantly has to reconcile conflicting interests which do not facilitate its action, if only by the social and economic consequences of each case. This is a significant factor, which can prove as vital as the protection of the environment.

 

 

II.- New ISSUES IN RELATION TO PARENT COMPANY LIABILITY ARISING from the new article L. 512-17 of the Environmental Code

 

Article L. 512-17 of the Environmental Code provides for a case where parent companies are liable for their subsidiaries, the aim of which is to reduce the practical difficulties of the administrative action. In a new step, the legislator has established a new legal action under commercial law in relation to the rehabilitation obligation, which supplements the sources of the law of classified installations.

While respecting the principle of corporate autonomy, the abovementioned article L. 512-17 provides for a new case of parent company liability for its subsidiary (A.), whose practical application raises some uncertainty (B.).

 

A. – Provision for a new case of parent company liability for its subsidiary

 

Article L. 512-17 para. 1 of the Environmental Code deriving from the law of 12 July 2010 states "where the operator is a subsidiary within the meaning of article L. 233-1 of the Commercial Code and where a compulsory liquidation procedure was opened or pronounced in its regard, the liquidator, the public prosecutor or the representative of the State in the department may petition the court that opened or pronounced the compulsory liquidation to recognise the existence of an established fault committed by the parent company which contributed to the subsidiary's insufficiency of assets requesting, when such a fault is established, that the parent company be compelled to partially or totally finance the measures to rehabilitate the site or sites when activities cease".

 

This new case of liability, which is based on the liability action against managers for insufficiency of assets contained in article L. 651-2 of the Commercial Code, differs from liability actions under ordinary law in its implementation and effects. Moreover, its scope is limited to a transfer of the financial burden of the obligation to rehabilitate sites where a classified installation was operated.

 

1) Prerequisites for the action

 

The first prerequisite for bringing the action concerns the nature of the bond between the parent company and the operator. The parent company must hold an equity interest in the operator of more than 50%. This relationship of subordination, which is the strictest provided for in the Commercial Code, constitutes an important limit of the liability mechanism.

The legislator, concerned with observing the principle of corporate autonomy, did not wish to extend the action to cases where the parent company merely holds an interest in or exercises a dominant influence on the operator of the classified site.

 

The second condition relates to whether compulsory liquidation proceedings have been opened^[2] or pronounced against the subsidiary.

 

Consequently, if the operating company ceases to exist following a voluntary liquidation procedure, the proceedings provided for in article L. 512-17 of the Environmental Code cannot be implemented (Cass. Com., 26 mars 2008, n° 07-11.619, cited above.).

Similarly, if the compulsory liquidation procedure is closed owing to insufficiency of assets, it appears that the action contemplated by article L. 512-17 of the Environmental Code does not allow to the compulsory liquidation procedure to resume if it emerges that assets were not realised or that actions in the interests of creditors were not initiated.

 

Concerning the parties entitled to bring the action, article L. 512-17 of the Environmental Code introduces an action which may only be initiated by the prefect, the public prosecutor or the liquidator. The prefectural authority is thus attributed new power.

Since the action merely constitutes an option, as far as the prefect is concerned, it will doubtless represent a solution to used as a last resort.

 

On the procedural level, the action will be heard in the commercial court that opened or pronounced the compulsory liquidation in respect of the subsidiary. No limitation period is specified, and the provisions of article L. 152-1 of the Environmental Code could apply, which provide for a thirty year period in respect of "financial obligations relating to the remedying of damage to the environment".

 

2) Components of the parent company's liability 

 

In order for the parent company to be found liable, the applicant must prove that a causal relationship existed between a fault and the damage: in this case, an established fault that contributed to the subsidiary's asset deficiency.

The notion of established fault, which stems from a parliamentary compromise^[3], is not defined.

Insofar as it is a qualified fault, it is more serious than a simple fault. Less serious than fraud, gross negligence, inexcusable error or deliberate misconduct, it does not imply the intent to cause harm.

 

In theory, a minor offence, simple carelessness or negligence should not lead to liability on the part of the parent company. On the other hand, a series of simple faults could be regarded as constituting an established fault, as case law has held in relation to unintentional offences.

 

The common point with managers' liability for insufficiency of assets is that the established fault merely has to have "contributed" to the subsidiary's insufficiency of assets, with moreover no direct connection being made by the text with the rehabilitation obligation. It is therefore not necessary to prove that the established fault is the sole direct cause of the insufficiency of assets.

 

The insufficiency of assets, which constitutes the damage, corresponds to the fraction of debts not covered by company assets, and the liabilities resulting from verified and permitted claims. Assets consist of the proceeds of their realisation.

 

Inspired by the manager liability action, the rules established by case law for this action should apply to the action of article L. 512-17 of the Environmental Code. Thus, the insufficiency of assets is evaluated on the day on which the court issues a ruling, and a provisional sentence can be pronounced, to be adjusted when the total liabilities have been precisely ascertained.

 

In addition, still in connection with the liability action against managers, the amount of the sentence is determined at the sovereign discretion of the judge, who is not obliged to order full reparation of the damage and can even decide not to pass sentence. Conversely, he can order that the offender bear the entire asset deficiency, even if the fault only caused part of the company debts. The amount of the sentence cannot, however, exceed the asset insufficiency, which the judge must specify on the day of judgement. Finally, when several management faults are recognised, the judge must legally justify each of them.

 

These same capacities of the judge and their limits could apply to the action provided for in article L. 512-17 of the Environmental Code.

 

3) Result of the action

 

The purpose of the action against the parent company is for the latter to be held liable, not for all or part of the asset insufficiency, nor even the entire environmental debt, but merely for all or part of the financing of the measure to rehabilitate the sites operated by its subsidiary when activities cease.

The assessment of the cost of rehabilitating the site when activities cease, which is possible only when the cessation of activities procedure ends, should lead the judges to issue, as with managers' liability, provisional judgements.

If the parent company is found liable, it will bear all or part of the financing of the site's rehabilitation. How the sums paid in connection with this site rehabilitation are to be appropriated is however not specified by article L. 512-17 of the Environmental Code.

A compensation mechanism is, moreover, provided for if sums were consigned at the request of the prefectural authority, to avoid exceeding the final cost of the rehabilitation work. The effectiveness of this deduction is however related to the decision issued by the Court of Cassation concerning the privileged character of the claim arising from the consignment order, when it rules on this point.

Lastly, to prevent the creation of shell parent companies intended to elude the mechanism, article L. 512-17 of the Environmental Code provides for the possibility, in the event the liable parent company cannot pay what it is ordered to pay, of suing, under the same conditions, the "grandparent" company (of which it itself is a subsidiary).

 

 

B. - Practical uncertainties associated with the implementation of the new mechanism

 

It is difficult to evaluate the scope of the new mechanism that has not yet been tested in the commercial courts, but already, several uncertainties about its practical application arise.

First of all, the prefectural authority, which has a central role in connection with this new action, is not familiar with the legal system and will not necessarily be informed of the situation of the company operating the site.  

 

Next, one of the major difficulties of the procedure will be to evaluate the amount of the claim, which will depend to a great extent on the future of the site as far as its use is concerned. The quantum of the rehabilitation obligation can only be determined at the end of the rehabilitation procedure, when the future use of the site has been defined and the prefectural requirements established. If the procedure is still at an early stage, the evaluation will be very approximate and will only provide a partial financial solution. In any event, no evaluation will be possible without a study by a specialised firm, whose cost would then imply an additional provision, as the case may be.

 

In addition, questions arise about the effectiveness of the mechanism if the parent company is constituted under a foreign law, which the administration, and then the judge, will have to deal with.

 

Since the mechanism of article L. 512-17 of the Environmental Code only targets parent companies holding a stake of at least 50% in a subsidiary, it will be very easy to circumvent.

The action of article L. 512-17 referred to above does not prohibit the attempt to hold the parent company liable for the asset insufficiency of the subsidiary operating the site, on the basis of article L. 651-2 of the Commercial Code, on condition that it can be proved that it acts as a manager with respect to its subsidiary. It is also possible to request an extension of the collective insolvency proceedings opened against the operator, on the basis of fictitiousness or the pooling of assets and liabilities.

 

Given the difficulties with implementing  these actions, one can however only be sceptical as to the utility of these parallel routes.

 

In conclusion, there is no denying that the mechanism introduced by article L. 512-17 of the Environmental Code is the result of a compromise which proponents of "active ecology" may find too timid. The safeguarding of the collective interests referred to in article L. 511-1 of the Environmental Code (which include the environment and public health) will undoubtedly prompt the commercial courts, which are not familiar with the subtleties of the rehabilitation obligation regime in relation to the law of classified installations, to find innovative solutions. For this reason, the intervention of the administrative courts within the framework of preliminary questions could prove invaluable, should the question of the legality of an administrative instrument imposing rehabilitation measures arise.

 

The new mechanism created by article L. 512-17 of the Environmental Code, which is applicable immediately, is already having an effect on company cessations and acquisitions and on the liability of shareholders. It follows that the company that acquires the "target" company will henceforth have to redouble its vigilance, monitoring the changing contours of the rehabilitation obligation and its consequences on the reciprocal contractual undertakings of each party. From this angle, the evaluation of the risks taken by the acquirer will require an intimate knowledge of the rehabilitation obligation at the legal, technical and financial levels.

All in all, rather than posing a genuine immediate threat to industry groups, parent companies and their subsidiaries, the new article L. 512-17 of the Environmental Code is nonetheless a strong incentive for industrial players to act more responsibly in the management of their sites.