On 2 February 2022, the Land and Environment Court of Appeal announced an interesting decision concerning the issue of liability in the transfer of a dry cleaning business (MÖD 2022:2).
The decision concerns an injunction in relation to investigation of potential contaminants directed against a limited liability company that acquired the asset from a limited liability company that operated a dry cleaning business. Shortly after the sale, the limited liability company that had sold the assets in the dry cleaning business was made bankrupt and consequently no liability could be directed against that company.
The lower courts considered that the limited liability company that acquired the asset had thereby assumed responsibility for the previous running of the business. However, the Land and Environment Court of Appeal did not share this assessment and therefore amended the judgement of the Land and Environment Court and overturned the underlying injunction. In its findings, the Land and Environment Court of Appeal makes it clear in a pedagogical way that the assessment of what may trigger a breach of environmental liability or takeover of liability for environmental damage in the event of a transfer of assets must not be decoupled from the principle that a limited liability company is a legal entity, the assets of which are separate from both its shareholders and its representatives.
The provisions of the Environmental Code entail a far-reaching liability for operators that engage in or have engaged in an activity that has given rise to pollution of an area of land or water, groundwater, a building or an installation that may damage or cause inconvenience to human health or the environment. Liability regulations for confirmed pollution damage can be found in Chapter 10 of the Environmental Code (1998:808) "MB". For chapter 10 MB to be applicable, it requires pollution to be established. In the case of pollution damage that has not yet been established, the supervisory regulations in chapter 26, section 22 of MB can constitute the basis for directing demands for investigations against the person who carries out an activity or the person who is otherwise obliged to rectify an inconvenience deriving from such activities. The basis for the Environmental Code's ruling is the principle of environmental law that the polluter pays.
The concept of the operator is not defined in the Environmental Code and the question of who should be regarded as an operator has been submitted for adjudication. It follows from practice that anyone who is actually and legally able to take action against alleged disturbances and inconveniences is to be regarded as an operator (MÖD 2005:64 and MÖD 2010:43). An operator can be both a natural person and a legal entity.
In the event of a transfer of a business through a share transfer, environmental liability remains with the shares transferred. If a transfer is made through transfer of assets, liability for operations carried out is not automatically transferred as there is no transfer of the shares. However, an environmental liability may also be transferred to the purchasing company in connection with a transfer of assets, see MÖD 2003:127 (Arvamet). In Arvamet, a limited liability company had used a a transfer of assets to take over and also continue to operate a business that had caused pollution.
BACKGROUND TO MÖD 2022:2
The ruling in question began as an injunction to produce a sampling plan and undertake a technical environmental investigation regarding expected potential contaminants linked to previous 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 municipal supervisory authority in Umeå (the "Supervisory Authority"). The Supervisory Authority stated that the reason the injunction was directed 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 pollution at property A. Company A had never conducted any business activities at this property.
Decision of the Land and Environment Court
Company A appealed the injunction to the county administrative board, which rejected the appeal. The company then appealed to the Land and Environment Court, which also rejected the appeal. According to the Land and Environment Court, there was a clear connection in terms of ownership interests between the two companies because it was a generational change and there were personal connections in the two companies. Furthermore, in its ruling, the Court attached importance to the fact that there was a temporal relationship between an injunction issued by the Supervisory Authority in 2018 against Company B concerning the investigation of pollution damage and the fact that Company A was formed shortly thereafter and that Company B also became bankrupt during this period. Additionally, the Land and Environment Court refers to the link between names, inventories, stocks, agreements with customers and suppliers and telephone subscriptions, and that Company A offered employment to Company B's staff. 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, that they could be considered to be the same business. According to the Land and Environment Court, the fact that Company A used its close connection to the previous business in its marketing was also a factor suggesting that Company A took over the business
Judgement 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 brought against physical or legal entities. 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, as Company A has never conducted any business on property A, it cannot be a question of "individual business operator liability" for Company A.
The Land and Environment Court of Appeal then proceeds to assess whether there has been a takeover of liability for any environmental damage to property A caused by Company B , either through a so-called breach of liability or through the transfer of assets referred to by the lower courts.
In its assessment, the Land and Environment Court of Appeal states that a limited liability company is a legal entity, the assets of which are separate from both its shareholders and its representatives (and employees). Neither owners nor representatives are liable for the company's debts in general or for the company's remedial liability under the Environmental Code. The Land and Environment Court of Appeal then highlights the fact that conditions exist in certain specific situations for breach of liability in the area of environmental law, i.e. that owners can be held liable for the company's debts and refers to MÖD 2013:28. According to that case, if there is a controlling influence over a subsidiary and financing takes place that facilitates the polluting activity, a parent company may be considered to be the operator of the subsidiary's business alongside the subsidiary.
However, the Land and Environment Court of Appeal does not consider that the situation in MÖD 2013:28 is comparable to a limited liability company acquiring part of the assets in the limited liability company that undertook the activity that may have caused pollution damage. According to the Court, neither can the existence of a family relationship among the owners/representative of the companies be attributed any independent significance in that assessment.
The Land and Environment Court of Appeal appears to be of the opinion that the Land and Environment Court has gone too far in its interpretation of the extent of the transfer of liability in connection with a transfer through sale of assets. Finally, the Land and Environment Court of Appeal states in its judgements that, in a legal sense, a transfer of assets does not have the same significance as a merger, where the acquiring limited liability company assumes all rights and obligations from the merged company and thus also its responsibility as business operator.
In summary, according to the Land and Environment Court of Appeal, this means that no conditions were present to order Company A to investigate pollution at property A. The judgement of the Land and Environment Court is thus amended and the Supervisory Authority's injunction is annulled.
The fact that, as in MÖD 2022:2, business transfers take place where there are personal connections between representatives in transferring and takeover companies is not uncommon. The fact that the Land and Environment Court of Appeal makes it clear through the decision that it is the principles of company law that must also constitute the starting point in conjunction with supervision under the Environmental Code is an important comment from the Court.
It is also important that circumstances such as a bankruptcy taking place in connection with a transfer cannot, unless it is a question of, for example, the group contribution case that could give rise to a breach of liability (MÖD 2013:28), in itself be considered to be such a circumstance that entails a transfer of liability.
The conclusion that can be drawn from the court case is that a transfer of assets alone does not entail a takeover of liability, but it is the fact that the activities continue to be carried out by the buyer that is relevant to the transfer of liability. In this case, the fact that the transferred activity did not continue to be carried out on the same property is likely to have also had an impact.