Environmental liability related to the sale of assets – new decision of the Court of Land and Environment Appeals

On February 2, 2022, the Land and Environment Court of Appeal issued an interesting decision regarding the issue of liability in the transfer of a dry cleaning business (MÖD 2022:2).

The decision relates to an injunction relating to an investigation of potential contaminants brought against a limited liability company which acquired the asset from a limited liability company which operated a dry cleaning business. Shortly after the sale, the limited liability company that had sold the assets of the dry cleaning business went bankrupt and therefore no liability could be directed against this company.

The lower courts held that the limited liability company that had acquired the asset had thereby assumed responsibility for the previous management of the business. However, the Land and Environment Court of Appeal did not share this assessment and therefore varied the judgment of the Land and Environment Court and quashed the underlying injunction. In its conclusions, the Land and Environment Court of Appeal specifies in a pedagogical manner that the assessment of what can trigger a breach of environmental liability or assumption of responsibility for environmental damage in the event of transfer of assets should not be decoupled from the principle that a limited liability company is a legal person whose assets are distinct from its shareholders and representatives.

LEGAL REGULATION

The provisions of the Environment Code engage a broad responsibility for operators who engage or have engaged in an activity that has given rise to the pollution of land or a body of water, groundwater, of a building or facility that could cause damage or inconvenience. for human health or the environment. Liability rules for confirmed pollution damage can be found in Chapter 10 of the Environmental Code (1998:808)”MB“. For chapter 10 MB to apply, pollution must be detected. In the event of pollution damage not yet detected, the monitoring rules of chapter 26, section 22 MB can form the basis for directing claims for damages. investigations against the person carrying out an activity or the person otherwise required to remedy a disadvantage deriving from such activities. The decision of the Environmental Code is based on the principle of environmental law according to which the polluter pays.

The notion of operator is not defined in the environmental code and the question of who should be considered as an operator has been submitted to arbitration. It follows from practice that anyone who is effectively and legally able to take action against alleged disturbances and inconveniences should be considered an operator (MÖD 2005: 64 and MÖD 2010: 43). An operator can be both a natural person and a legal person.

In the event of the sale of a company by sale of shares, the environmental responsibility remains with the shares sold. If it is a transfer by transmission of assets, the liabilities of the transactions carried out are not automatically transferred since there is no transfer of securities. However, an environmental responsibility can also be transferred to the purchasing company within the framework of a transfer of assets, see MÖD 2003:127 (Arvamet). In the Arvamet case, a limited liability company used an asset transfer to take over and continue to operate a business that had caused pollution.

MÖD BACKGROUND 2022:2

The decision in question began as an order to produce a sampling plan and undertake a technical environmental investigation regarding the expected potential contaminants related to past dry cleaning activities on Property A.

The injunction was directed against the company Kem-Man i Umeå AB (“Company A“). The injunction was issued by the Umeå Municipal Supervisory Authority (the “Supervisory authority“). The Supervisory Authority stated that the reason for the injunction against Company A was that Company A had acquired the business operated by Tobom AB (“Company B“) through a transfer of assets, and had thus taken over responsibility for the pollution caused by company B, which also included the pollution of property A. Company A had never carried on any business on this property.

Decision of the Land and Environment Court

Company A appealed the injunction to the County Administrative Board, which denied the appeal. The company then appealed to the Land and Environmental Tribunal, which also rejected the appeal. According to the Land and Environmental Tribunal, there was a clear link in terms of ownership between the two companies as it was a generational change and there were personal links in both companies. Furthermore, in its decision, the Court attached importance to the fact that there was a temporal link between an injunction issued by the Supervisory Authority in 2018 against company B concerning the investigation of the pollution damage and the fact that Company A was incorporated shortly thereafter and Company B also went bankrupt during this period. In addition, the Land and Environment Tribunal refers to the link between names, inventories, stocks, agreements with customers and suppliers and telephone subscriptions, and that company A offered employment to the personnel of company B. According to the Court, this meant that there was sufficient similarity between the operations in the form of laundry and dry cleaning, as well as hotel and industrial cleaning, for them to be considered the same activity . According to the Land and Environment Court, the fact that Company A used its close connection to the previous activity in its marketing was also a factor suggesting that Company A took over the activity.

Judgment of the Land and Environment Court of Appeal

The Land and Environment Court of Appeal begins its reasoning by stating that an injunction can only be exercised against natural or legal persons. In other words, the business itself – in this case dry cleaning and hotel and industrial cleaning – cannot be subject to injunctions. According to the Land and Environment Court of Appeal, company A having never carried out any activity on property A, there can be no question of “individual liability of the operator” for company A.

The Land and Environment Court of Appeal then assesses the existence of any environmental damage caused to property A by company B, either through a so-called breach of liability, or by the transfer of assets contemplated by the lower courts.

In its assessment, the Land and Environment Court of Appeal specifies that a limited liability company is a legal person whose assets are distinct both from its shareholders and from its representatives (and employees). Neither the owners nor the representatives are liable for the debts of the company in general or for the restorative liability of the company under the environmental code. The Land and Environment Court of Appeal then points out that in certain specific situations there are conditions for breach of liability in environmental law, i.e. owners can be held liable debts of the company and refers to MÖD 2013:28. According to this case, if there is a dominant influence over a subsidiary and there is financing that facilitates the polluting activity, a parent company can be considered the operator of the activity of the subsidiary alongside the subsidiary. .

However, the Land and Environment Court of Appeal does not consider the situation in MÖD 2013:28 to be comparable to a limited liability company acquiring part of the assets of the limited liability company which has undertaken the likely activity. of causing pollution damage. According to the Court, the existence of a family link between the owners/representatives of the companies cannot be attributed independent importance in this assessment either.

The Land and Environment Court of Appeal appears to be of the view that the Land and Environment Court went too far in its interpretation of the extent of the transfer of liability in the context of a transfer by sale of assets. Finally, the Land and Environment Court of Appeal specifies in its judgments that in the legal sense, a transfer of assets does not have the same scope as a merger, in which the acquiring public limited company takes over all the rights and obligations of the merged company and therefore also its liability as an economic operator.

In summary, according to the Land and Environment Court of Appeal, this means that no condition was met to order Company A to investigate the pollution of Property A. The judgment of the Land and Environment Court of the environment is thus modified and the injunction of the Supervisory Authority is cancelled.

Closing comments:

The fact that, as in MÖD 2022:2, company transfers take place where there are personal ties between the representatives of the transfer and takeover companies is not uncommon. The fact that the Land and Environment Court of Appeal specifies in the judgment that it is the principles of company law which must also constitute the starting point in conjunction with the control provided for by the Environment Code is an important remark by the Court.

It is also important that circumstances such as bankruptcy occurring on the occasion of a transfer cannot, except in the case, for example, of a collective contribution which could give rise to a breach of responsibility (MÖD 2013:28), in itself be considered as such a circumstance giving rise to a transfer of responsibility.

The conclusion that can be drawn from the court case is that a transfer of assets alone does not result in an assumption of liability, but it is the fact that the activities continue to be carried on by the buyer who is relevant for the transfer of liability. In this case, the fact that the transferred activity did not continue to be exercised on the same property is also likely to have had an impact.