#Director Liability in French Insolvency Proceedings

Your situation and your risks

Your company is in judicial reorganisation (redressement judiciaire) or judicial liquidation (liquidation judiciaire). As a director, whether de jure or de facto, you may face claims in a personal capacity. The risks differ depending on the proceedings and on the facts alleged. They affect your personal assets, your right to manage a business and, in the most serious cases, your exposure to criminal charges.

Three sets of measures coexist. The first is the action for liability for shortfall in assets, specific to judicial liquidation. The second covers personal bankruptcy (faillite personnelle) and director disqualification (interdiction de gérer). The third falls under criminal law, with the offence of fraudulent bankruptcy (banqueroute).

Facing a claim is not the same as being held liable. The court must establish specific facts and, for a shortfall in assets, a management error that contributed to the uncovered liabilities. Your defence should be prepared from the opening of the proceedings, on the basis of your management records. For an overview, see our page on directors’ liability (in French).

Director liability in French insolvency proceedings: the legal framework

The action for liability for shortfall in assets is provided for by Article L. 651-2 of the French Commercial Code (Code de commerce) (in French). It requires a judicial liquidation (in French) that reveals a shortfall in assets. The court must find a management error that contributed to this shortfall. It may then order the directors who contributed to the error to bear all or part of the shortfall.

• Mere negligence: where there is mere negligence in management, the director cannot be held liable for the shortfall in assets.
• Ceiling: the order covers the amount of the shortfall in assets, “in whole or in part”, and never more.
• Several directors: the court may, by a reasoned decision, declare them jointly and severally liable.
• Limitation period: the action is time-barred three years after the judgment ordering the judicial liquidation.
• Allocation: the sums paid become part of the debtor’s assets and are distributed among all creditors.

The case is brought before the court by the liquidator or by the public prosecutor (Article L. 651-3 of the Commercial Code (in French)). A majority of the creditors appointed as controllers may also act, if the liquidator has not brought the action after a formal notice that went unanswered. The president of the court may order protective measures over the directors’ assets (Article L. 651-4 of the Commercial Code (in French)).

Personal bankruptcy and director disqualification are governed by Articles L. 653-1 et seq. of the Commercial Code (in French). They may be ordered in judicial reorganisation as well as in judicial liquidation. These actions are time-barred three years after the opening judgment. For a director of a legal entity, Article L. 653-4 (in French) covers in particular having used the company’s assets as if they were their own. It also covers the wrongful continuation, in their personal interest, of a loss-making business.

Other acts are listed in Article L. 653-5 (in French), such as accounts that are missing, fictitious or manifestly irregular. A deliberate refusal to cooperate with the bodies of the proceedings is also on this list. Under Article L. 653-8 (in French), director disqualification may sanction a knowing failure to apply for the opening of proceedings. The deadline is forty-five days from the cessation of payments, unless conciliation has been requested.

The court sets the duration of the measure, which may not exceed fifteen years (Article L. 653-11 of the Commercial Code (in French)). The director may apply to have it lifted, in particular if they have made a sufficient contribution to paying the liabilities.

On the criminal side, Article L. 654-2 of the Commercial Code (in French) defines fraudulent bankruptcy. It covers in particular the misappropriation or concealment of assets, the fraudulent increase of liabilities and fictitious or manifestly irregular accounts. Fraudulent bankruptcy is punishable by five years’ imprisonment and a €75,000 fine (Article L. 654-3 (in French)).

How we can help

• Analysing the allegations: facts alleged, provision relied on, standing of the claimant and compliance with the limitation period.
• Distinguishing a management error from mere negligence and challenging the link between each decision and the shortfall in assets.
• Gathering the documents that explain your choices: accounts, minutes, exchanges with your financial partners, preventive measures taken.
• Representing you before the court, challenging the amount claimed and, where there are several directors, each one’s share.
• Coordinating the civil and criminal defence when proceedings for fraudulent bankruptcy are brought in parallel.
• Preparing, when the time comes, an application to have the prohibitions lifted.

What is at stake for you

The stakes are first financial: an order to cover a shortfall in assets is borne by the director personally. If the sums ordered against the director are not paid, the court may order their personal bankruptcy (Article L. 653-6 of the Commercial Code (in French)).

The stakes are also professional. Personal bankruptcy entails a prohibition on directing, managing, administering or controlling any commercial or craft business and any legal entity (Article L. 653-2 (in French)). Director disqualification may cover all of these businesses or only some of them.

Every situation is different. An early review of your case makes it possible to anticipate the allegations and prepare a documented defence. We assist you at every stage, without being able to predict the court’s decision.

Every situation is different: the information on this page is general and does not replace legal advice tailored to your case. The firm makes no promise of outcome; it commits to the means it deploys.