Director liability in France: mismanagement and sanctions

A company protects personal assets, so the saying goes. In a liquidation, that protection falls away faster than most directors imagine. A lawyer reviews your situation in 20 minutes on Avocat20min.fr.

Director liability: three separate grounds

A director answers for their acts on three levels, each with its own rules.

Ground	Who brings the claim	What is at stake
Towards the company and its shareholders	The company, or a shareholder	Damages
Towards third parties	A client, a supplier, an employee	Compensation, out of personal assets
In insolvency proceedings	The liquidator, the public prosecutor	Contribution to the debts, ban on managing

Tax liability and criminal liability come on top of these three, and both strike the director personally.

Mismanagement

The notion covers any act contrary to the company's interest, whether by action or by omission. Courts regularly accept:

• Carrying on a loss-making business without any recovery measure.
• The absence of accounts, or manifestly irregular accounts.
• Personal spending paid by the company.
• Failure to declare insolvency within forty-five days.
• The absence of compulsory insurance, in construction in particular.

Since the law of 9 December 2016, simple negligence no longer engages director liability for a shortfall of assets. That clarification has ruled out many claims resting on a single error of judgment.

The action for shortfall of assets

This is the most feared form of director liability. Provided for by article L.651-2 of the Commercial Code, it opens only in a liquidation, where the assets do not cover the debts.

The liquidator must establish three things: mismanagement, a quantified shortfall of assets and a causal link between them. The court then orders the director to bear all or part of the debts, according to the seriousness of the facts.

The claim is time-barred three years after the liquidation judgment. It targets the director in law as well as the de facto director, meaning whoever really runs the company without holding the title.

Fault separable from office

Facing a third party, director liability hides in principle behind the company's own. The Cour de cassation has nevertheless created an exception: an intentional fault of particular seriousness, incompatible with the normal exercise of corporate duties.

A scheme designed to escape a commitment, false information given to a partner, or the sale of an asset already pledged fall into this category. The third party then sues the director directly, on their personal assets.

This route thrives above all once the company has disappeared. An unpaid supplier naturally looks for a solvent debtor, and an unpaid invoice sometimes ends in a claim against the former manager.

Tax debts, personal sanctions and criminal law

Director liability also extends to the tax authorities: article L.267 of the Book of Tax Procedures lets the public accountant ask the court to hold the director jointly liable for the company's taxes, in cases of fraudulent manoeuvres or serious and repeated breaches of tax duties.

The court may also impose personal sanctions:

• A ban on managing, for up to fifteen years, which closes any business leadership role.
• Personal bankruptcy, which adds civic disqualifications.
• Fraudulent bankruptcy, an offence punished by five years' imprisonment and a €75,000 fine.

Misuse of company assets, breach of trust and concealed employment complete the criminal arsenal. These offences combine easily with the civil claims.

Protecting yourself, in practice

Several reflexes clearly reduce director liability:

• Keeping the accounts up to date and having them approved on time.
• Documenting difficult decisions with reasoned minutes.
• Declaring insolvency within forty-five days, which removes one of the most frequently accepted faults.
• Taking out directors' and officers' liability insurance, which covers the defence and civil awards.
• Limiting personal guarantees, and negotiating their duration and amount.

Finally, anticipate difficulties through an ad hoc mandate or conciliation. These confidential procedures come before insolvency and neutralise part of the personal risk.

When to consult a lawyer

A lawyer assesses the real exposure, prepares the defence against the liquidator and negotiates bank guarantees. They also act upstream, during shareholder disputes or when setting up a company. A business lawyer answers within 20 minutes. The texts sit on Légifrance.