Key points
- The action en comblement de passif, now called the action for liability for shortfall in assets, can result in a director being ordered to bear, out of their personal assets, all or part of the shortfall in assets in a judicial liquidation.
- It requires three cumulative conditions: the judicial liquidation of a legal entity, a shortfall in assets and a management error that contributed to that shortfall; mere negligence is excluded.
- The causal link between the error and the shortfall in assets is essential and must be proved by the claimant: an error without effect cannot ground the action.
- The action targets de jure directors but also de facto directors who exercised decisive influence without holding the official title.
- The director can defend themselves by disputing the error or the causal link, or by relying on external circumstances; the action is time-barred three years after the judgment ordering the judicial liquidation.
The action en comblement de passif, which the French Commercial Code (Code de commerce) now refers to as the action for liability for shortfall in assets, is the procedure by which the liquidator or the public prosecutor can ask the court to order a company director to bear, out of their personal assets, all or part of the shortfall in assets established in a judicial liquidation (liquidation judiciaire). If the liquidator fails to act after a formal notice, a majority of the creditors appointed as controllers can also bring the matter before the court (Article L. 651-3 of the French Commercial Code (in French)). This action can result in a personal order against the director for an amount up to the entire shortfall in assets.
It is not automatic. It requires specific conditions to be met and can be challenged. But the stakes are high enough for every director of a company in difficulty to understand how it works.
Conditions of the action
Under Article L. 651-2 of the Commercial Code (in French), the action requires three cumulative conditions: the judicial liquidation of a legal entity, a shortfall in assets (the realisable assets are insufficient to pay the creditors), and one or more management errors that contributed to that shortfall in assets.
The causal link between the management error and the shortfall in assets is an essential condition: a management error that did not contribute to the shortfall in assets cannot ground the action. The claimant must prove this link.
Which management errors are concerned?
The courts interpret the notion of management error broadly. It can include continuing a loss-making business with no reasonable prospect of recovery, excessive withdrawals to the detriment of the company, irregular or non-existent accounts, failure to declare the cessation of payments within the statutory time limit, abnormal management acts to the detriment of creditors (undervalued asset disposals, preferential payments to certain creditors), or serious breaches of legal obligations or of obligations under the articles of association.
Mere negligence by the director in management does not make them liable for the shortfall in assets, and the error must have contributed to creating or worsening that shortfall.
Who can be held liable?
The action can be brought against de jure directors (managers (gérants), presidents, chief executive officers (directeurs généraux)) but also against de facto directors, that is, persons who in fact performed management functions without holding the official title. The notion of de facto director is assessed according to the circumstances and can include majority shareholders, partners or third parties who exercised decisive influence over the company’s decisions.
The director’s defence
A director facing an action for shortfall in assets has several defences. They can dispute the existence of management errors by showing that the decisions taken were reasonable in light of the information available at the time they were taken. They can dispute the causal link between the alleged errors and the shortfall in assets. They can rely on external circumstances that contributed to the difficulties (sector-wide crisis, default of a major customer, unforeseeable regulatory change).
Limitation period and time limits
The action is time-barred three years after the judgment ordering the judicial liquidation, not after the judgment opening the proceedings (Article L. 651-2 of the Commercial Code (in French)). A director who is not sued within this period can no longer be sued on this basis.
For assistance if you face claims, see our dedicated page on director liability in French insolvency proceedings.
For assistance: director liability lawyer (in French).
