Risk for managers of French companies in case of insolvency

27 October 2021
Nicola Kömpf

The French commercial code (section L.651-2) provides for sanctions against executives of French companies who have contributed by their management errors to a lack of assets, and French courts do not hesitate to apply such sanctions.

The goal is to repair the damage caused to the company and to remove those managers from business life.

1. Who are the executives concerned?

French law simply refers to de jure or de facto managers.

Thus, a legal representative of a foreign company appointed as president of a French company argued not to be exposed to sanctions himself, not being directly the CEO in France, while another asserted that he accepted the mandate as CEO for free.

The French High Court (« Cour de cassation ») considered that not to receive any remuneration is not a criterion for liability (cass.com. 9 December 2020 n° 18-24730), nor does the indirect mandate prevent from sanctions.

The same degree of severity was applied to a CEO assistant (« directeur général délégué ») who argued not to have any independence regarding his decisions, acting internally only as an assistant to the general manager.

The French High Court nevertheless considered that the CEO assistant is empowered towards third parties with the same duties as the CEO himself, and thus subject to the same sanctions (cass.com 5 May 2021 n° 19-23575).

Consequently, the acceptance of a mandate as executive manager in a French company could be risky!

2. Could simple negligence be considered as a management error?

In principle, with reference to section L.651-2 of the French Commercial Code, simple negligence cannot be subject to sanctions, but the question is, whether the fact that a manager could not have ignored the error, could be considered as a simple negligence, or automatically constitutes an intentional fault.

In a decision dated 3 February 2021 (cass.com. 3. February 2021 n° 19-20.004), the French High Court considered that the impossibility to ignore the status of insolvency (« état de cessation des paiements ») does not exclude de facto an error by simple negligence while the same court judged (cass.com. 5 February 2020 n° 18-15/075) that the knowledge of an error demonstrates obviously the intentional element of the management error and insofar excludes any qualification as simple error.

Consequently, it is not advisable to ignore any problem a manager of a French company has to be aware of.

3. What does « lack of assets » mean?

Since the sanction of the faulty manager is linked to a « lack of assets » in the frame of an insolvency or liquidation procedure, the liquidator has at least to prove that the management error contributed to such a lack and that such a situation occurred during the mandate of the concerned manager, in other words if the dismissal is stated before the lack of assets occurs and even if the publication and formalities are not already completed, the manager cannot be held liable.

Consequently, once a manager is aware of major difficulties and is not able to proceed with their improvement, he should withdraw as soon as possible from his mandate and evidence his dismissal, for example by registered letter with acknowledgement of receipt.

4. What are the sanctions the manager may face?

On the one hand, the manager may be condemned to reimburse in part or in total the lack of assets and, on the other hand, sections L.653-2 and L.653-8 of the French Commercial Code provide for personal bankruptcy or the prohibition to direct, manage or administrate a French commercial cooperation.

Nicola Kömpf, Partner.