The fault (intentional or not) of a parent company that contributed to the collapse of its subsidiary exposes it to compensation for the employees of its subsidiary

The fault (intentional or not) of a parent company that contributed to the collapse of its subsidiary exposes it to compensation for the employees of its subsidiary

Press and publications

Monday 2018 December 17

It is accepted that in bankruptcy proceedings, when the judicial liquidation of a legal person is pronounced and reveals, an insufficiency of assets, parent companies that have acted as directors by law, or as de facto directors, and have committed a mismanagement fault, may be ordered to bear the insufficiency of assets pursuant to Article L651-2 of the French Commercial Code.

Thus, this action in liability for insufficient assets will allow the Liquidator to recover assets to pay off creditors.

The autonomy of the entities constituting a group may also be compromised in a bankruptcy context through the liability common law system. Indeed, the Supreme Court has clearly admitted since 2014 that the employees of a liquidated subsidiary may act in tort against the group head company (the notion of control playing a decisive role here...) as soon as the latter has, by its decisions, worsened the economic situation of its subsidiary, in its own interest, resulting in the loss of employments.

By 3 new judgments handed down in May 2018, the Supreme Court reaffirmed this type of action for employees, which is conditional upon the evidence of a fault, a prejudice and a causal link.

The High Court of Justice has clarified the notion of "fault" and the nature of the "damage".

Regarding the requested fault, it will have to concern a matter of management decisions taken improperly by the parent company, most of the time in its own interest, thereby jeopardizing the subsidiary’s performance or contributing to the suspension of payments. The notion of "blameworthy thoughtlessness" (“légèreté blamable”) used in 2014 seems to have disappeared in favor of a more restrictive notion of fault (without requiring a serious fault).

Regarding the damage, the faulty behavior of the parent company must have caused the opening of a liquidation proceedings against its subsidiary and thus caused the "loss of employment" of its employees. The amount of compensation due in this respect is however left to the discretion of civil judge, who may usefully refer to the scale of Macron Orders used by labour courts in case of dismissal without real and serious cause. If this approach is confirmed by the courts, the concerned companies would thus have visibility on the amount of provisions to be set aside in case of proceedings initiated by the employees of its subsidiaries.

What to keep in mind...
Group head companies, and their majority shareholders, will therefore be advised to consider the scope of decisions taken under the pretext of the corporate or group interest. We immediately think here of operations such as massive dividend payments, current account repayments, debt-push downs, management fees payment or, more generally, re-invoicing, etc.

In practice, it will be necessary for each taken decision to measure its impact and the exact financial and social consequences at the level of subsidiaries whose efforts, particularly financial, will have to be measured in terms of their real capacity. The spectre of the subsidiary's failure is no longer theoretical in a tense economic environment.

Nevertheless, the question of the administration of evidence (of the fault and the necessary causal link with the damage) and therefore of the material possibility of employees to access information, will certainly be an issue in the context of the procedures they would be tempted to initiate.

Jean Melcion, partner, and Alexane Chicheportiche, attorney