Key points
- Judicial liquidation (liquidation judiciaire), governed by Article L640-1 of the French Commercial Code (Code de commerce), applies when the company can no longer be rescued and requires the sale of its assets.
- The opening of proceedings must be requested from the court within 45 days of the cessation of payments (cessation des paiements); in liquidation, the court appoints a liquidator (liquidateur judiciaire).
- The liquidator replaces the director, sells the assets and pays the creditors in the order set by Article L643-8 of the Commercial Code.
- After closure for insufficient assets, creditors do not, in principle, recover their individual rights of action, subject to the exceptions in Article L643-11 of the Commercial Code.
- The director faces personal sanctions such as personal bankruptcy (faillite personnelle), a management ban (interdiction de gérer) or criminal bankruptcy (banqueroute) in the event of misappropriation of funds.
You are dealing with a difficult situation when your company is in cessation of payments. Article L640-1 of the Commercial Code (in French) governs judicial liquidation, which applies when the company can no longer be rescued. This procedure requires the sale of the assets to repay the creditors. You need to know each step to protect your interests and those of your company.
Cessation of payments and opening of the proceedings
As soon as your company can no longer meet its liabilities that have fallen due out of its available assets, you must ask the court to open proceedings within 45 days of the cessation of payments, unless you request conciliation within that period. At this stage, you consult an insolvency lawyer to establish the right strategy. After analysing the situation, the court decides to open a judicial liquidation if rescue is manifestly impossible.
The court finds that the company cannot continue its business. It chooses liquidation to realise the assets and pay the creditors. The court then appoints a court-appointed liquidator, responsible for carrying out all the necessary operations.
Role of the court-appointed liquidator
The court-appointed liquidator takes charge of managing the company’s assets and debts. The liquidator sells the assets to repay the creditors. From appointment, the liquidator replaces the director for all day-to-day management decisions. The liquidator draws up the inventory of assets, sells them, and makes sure the creditors are paid according to the order of priority.
Your lawyer monitors these operations and defends your rights. The liquidator distributes the sale proceeds in the order set by Article L643-8 of the Commercial Code: certain preferential claims, such as guaranteed wages and legal costs arising after the judgment, rank ahead of creditors holding security interests, such as mortgages, who are themselves paid before ordinary creditors, such as suppliers. Your lawyer checks that this ranking complies with the law.
Closure for insufficient assets
When the assets are not enough to cover all the debts, the court orders closure for insufficient assets (clôture pour insuffisance d’actif). In principle, creditors do not then regain the right to bring individual actions against the debtor, subject to the exceptions in Article L643-11 of the Commercial Code. However, in the event of a management fault (faute de gestion) that contributed to the shortfall of assets, the liquidator or the public prosecutor (ministère public) may take action against the director (Articles L651-2 and L651-3).
Protecting the director: avoiding personal sanctions
Judicial liquidation often exposes the director to personal sanctions, especially in the case of poor management. The court may impose personal bankruptcy or a management ban. These sanctions require specific facts to be established, as listed in Articles L653-4 to L653-8 of the Commercial Code.
Your lawyer anticipates the actions of the court and the liquidator to limit these risks. If social security or tax debts are deliberately left unpaid, the court may treat this as a management fault. By working with a lawyer from the opening of the proceedings, you reduce the risk of sanctions.
Examples of potential sanctions
If you wrongfully continue, in your personal interest, a loss-making business that could only lead to cessation of payments, the court may order personal bankruptcy (Article L653-4 of the Commercial Code). Knowingly failing to request the opening of proceedings within 45 days also exposes you to a management ban (Article L653-8). These measures last for a maximum of fifteen years (Article L653-11). If you misappropriate company funds, you risk a conviction for criminal bankruptcy, a criminal offence punishable by five years’ imprisonment and a fine of €75,000 (Articles L654-2 and L654-3).
Strategies for avoiding sanctions
Your insolvency lawyer can develop several strategies to protect you. The lawyer can show that your company’s situation results from unforeseen external factors, such as an economic crisis or a sudden loss of market. The lawyer can also prove that you took steps to try to turn the situation around, such as negotiating new financing or rescheduling debts.
In some cases, the lawyer challenges the conditions of sale of the assets to obtain a better price. Communication with the court is also essential. Your lawyer thus puts forward your good faith and your cooperation with the authorities.
Judicial liquidation is a complex procedure. You should act with the help of an insolvency lawyer to protect your interests. By anticipating the creditors’ actions and defending yourself against allegations of management fault, you limit the personal consequences you could face. The lawyer assists you in putting forward your arguments against any application for sanctions.
For assistance: judicial liquidation lawyer in Paris (in French).
