Does paying one of the bills addressed to a subsidiary commit a parent company to pay other unpaid bills?
Under the patrimonial autonomy of corporations principle, the simple fact that one company controls another does not mean that it can be legally obliged to fulfil the controlled company’s commitments.
This limitation is, however, likely to be excluded when a subsidiary’s creditor may have had a legitimate reason to believe that the parent company became a party to its subsidiary’s commitment by interfering in its business.
For a creditor, such interference by the parent company is likely to mislead the creditor to believe that the parent company was his co-contracting party along with the subsidiary. Therefore, the creditor has the right to ask the parent company to pay any amounts due to him.
The French Court of Cassation has just clarified the conditions for the implementation of this theory of appearance (Judgment dated 9 November 2022), quashing a Paris Court of Appeal ruling (10 September 2020) in which the latter specifically ordered a parent company to pay its subsidiary’s unpaid bills.
The Paris Court of Appeal considered the fact the parent company had paid one of the invoices due by its subsidiary to a service provider legitimately established the belief of the parent company’s undertaking, alongside its subsidiary, to pay the debts relative to a services contract.
Consequently, the parent company, which had only paid one of its subsidiary’s unpaid invoices, was ordered to pay all of the debtor’s outstanding invoices.
Could interference result from the parent company making a sole partial payment towards the subsidiary’s outstanding debts?
For the first time, the French Court of Cassation responded negatively to this question.
This partial payment alone could not define interference by the parent company that would be susceptible to make the creditor believe the parent company had replaced its subsidiary in the execution of the contract.
Therefore, the sole fact that the parent company had paid one of its subsidiary’s unpaid invoices did not commit it to pay the creditor’s other unpaid invoices.
In practice, however, you should remain attentive to the context surrounding this type of payment. A partial payment accompanied by other circumstances, such as the parent company playing a leading role as the creditor’s point of contact, could justify the parent company being ordered to pay off any outstanding debts to the creditor.
To maintain the barrier between the patrimonies of companies belonging to the same group, we recommend that the parent company ensure that its subsidiaries make any payments directly to their own creditors.
Please don’t hesitate to contact our Corporate Team for help in ensuring your intra-group relations are protected.
