When a company encounters difficulties, the law provides for various mechanisms to try to turn it around or, failing that, to organise its liquidation under the best possible conditions. However, these procedures can also lead to the liability of directors being called into question, or even to their being punished. For an overview of the risks of sanctions that may threaten the directors of a company in difficulty, and to find out more about the procedural rules and remedies detailed here, see our summary article. Understanding how these sanctions are applied and how to defend against them is essential for any company director. Specific procedural rules apply whether the action is for liability for insufficient assets, personal bankruptcy or a management ban, or criminal proceedings for bankruptcy. The aim of this article is to shed light on these often complex aspects and to set out the possible avenues of appeal.
Procedure for liability for insufficient assets (articles L. 651-3, R. 651-1s of the French Commercial Code)
Liability action for inadequate assets, which is often feared because it can result in the director having to pay the company's debts out of his or her personal assets, is governed by a specific procedure. You can find out more about the basic conditions for this action in our dedicated article: Liability for insufficient assets: protect your personal assets.
The competent court and the persons entitled to bring proceedings
It is the court that opened or pronounced the judicial liquidation of the legal entity that has jurisdiction to rule on this action.. Referrals to it may only be made by persons listed exhaustively by law. This is a "dedicated" action.. The main player is the liquidator. The public prosecutor also has this option. Lastly, since the Safeguard Act of 2005, the majority of creditors appointed as controllers can also refer a case to the court.. However, this referral by the auditors is subject to conditions: it is only possible if the liquidator, after having been given formal notice by at least two auditors, has not taken action within a period of two months.. Any other person, even a convicted manager wishing to call another co-manager as guarantor, is inadmissible to bring an action on this basis..
Powers of investigation and precautionary measures
In order to inform its decision, the court, or its chairman, has investigative powers. In particular, it may order the disclosure of information on the assets and liabilities of the company's directors.or their permanent representatives, or from the personal assets of the sole trader (new status).
To ensure that any conviction is effective, the president of the court may also order any necessary precautionary measures against the assets of the persons in question (directors, representatives, sole traders, etc.).to prevent them from organising their insolvency during the proceedings. The appointment of an expert to examine the management of the director is also common..
Conduct of the proceedings and rights of the defence
Unlike most insolvency proceedings, which take place in chambers, proceedings relating to liability for insufficient assets take place in open court.. However, the director being prosecuted may request, before the opening of the hearing, that the hearing be held in chambers..
To ensure the rights of the defence, it is essential that the accused manager or entrepreneur be able to prepare a response. Any report drawn up by the official receiver must be sent to them at least one month before the hearing..
Limitation period
Liability for insufficient assets is subject to a three-year limitation period. This period runs from the date of the judgment ordering the compulsory liquidation of the legal person.regardless of the date on which the alleged mismanagement occurred. This is an objection that can be raised at any time during the procedure.but which cannot be raised by the court of its own motion. Important point: a writ of summons issued to a director does not interrupt the limitation period in respect of the other potentially liable co-managers, in the absence of automatic joint and several liability between them for this action..
Procedure for personal bankruptcy and prohibition on management (articles L. 653-1, R. 653-1s of the Commercial Code)
Professional sanctions, such as personal bankruptcy or disqualification from managing a business, are designed to remove from business life executives considered to be at fault. For a detailed analysis of the cases and effects of these measures, see our article : Personal bankruptcy and prohibition on management: the professional risks for the manager. Their implementation also obeys specific rules.
Competent court and referral
As with the previous action, it is the court that opened the receivership or compulsory liquidation proceedings that has jurisdiction to impose these sanctions.. Since the 2005 law, the court can no longer act on its own initiative.. The referral is made by the same parties as for the action for liability for insufficiency of assets: the court-appointed agent, the liquidator, the administrator (if his mission is maintained), the public prosecutor, etc.and the majority of controlling creditors under the same conditions (prior formal notice served by the liquidator without success).
Conduct of the proceedings and rights of the defence
Proceedings take place in open court, unless the defendant requests that they be held in camera.. The person being prosecuted must be able to organise his or her defence. Jurisprudence has reiterated the need for the public prosecutor to communicate his conclusions and for the executive to be able to respond to them effectively.. However, the Court of Cassation has clarified that the right to a fair trial does not imply that the defendant or his lawyer should systematically have the last word after the public prosecutor's closing arguments when the latter intervenes as an added party..
It should be noted that the official receiver who investigated the case, the president of the court who heard the case in prevention or the judge assigned to the case may not sit on the judgment panel or take part in the deliberations concerning these sanctions..
Limitation period
An action seeking a declaration of personal bankruptcy or a management ban is also time-barred after three years from the date of the judgment opening the receivership or compulsory liquidation proceedings.. In the event of conversion of a reorganisation into liquidation, the starting point remains the initial judgment opening the collective proceedings..
A special feature exists for the specific action aimed at sanctioning a manager who fails to comply with a previous order to make good liabilities (art. L. 653-6). For this specific action, the three-year statute of limitations only runs from the date on which the order to pay insufficient assets becomes final..
Impossible to compromise
Unlike an action for liability for inadequate assets, where a settlement is possibleIt is impossible to compromise on the imposition of a professional sanction.. The Court of Cassation has clearly stated that these measures are intended to protect the general interest and not the collective interest of creditors, and that a settlement cannot defeat an action for a professional sanction..
Procedure for bankruptcy and related offences (articles L. 654-16s of the Commercial Code)
Bankruptcy and related offences come under criminal law and are subject to separate proceedings before the criminal courts. The constituent acts and penalties are detailed in our article : Bankruptcy and related offences: the criminal penalties that threaten managers.
Competent court and public prosecution
The criminal court (possibly within a specialised economic and financial division) has jurisdiction over bankruptcy and related offences.. Public prosecution is carried out by the Public Prosecutor's Office. The latter has a right of communication and may request the administrator or liquidator to hand over all relevant documents held by them..
Civil action
The civil action, which seeks compensation for the damage caused by the offence, may be brought before the criminal court.. It may be filed by the liquidator or the administrator, acting on behalf of and in the collective interest of the creditors, with the authorisation of the juge-commissaire.. The public prosecutor may also exercise this right. A creditor acting individually may also bring a civil action if he can prove that he has suffered a personal loss that is distinct from the collective loss.
Limitation period on public action
The statute of limitations for public prosecution of the offence of bankruptcy is in principle six years (the general statute of limitations for offences). However, a specific derogatory rule applies: where the offences were committed before the opening judgment, the statute of limitations does not start to run until the date of this judgment (opening the safeguard, reorganisation or liquidation).. As long as no collective proceedings have been initiated, the time limit does not run.which can allow prosecutions to take place long after the acts have been committed.
Publicising convictions
In the event of a conviction for bankruptcy or a related offence, the judgment or ruling must be published at the expense of the convicted person, in a manner to be determined by the court (e.g. publication in one or more newspapers)..
Appeal procedures
Decisions to impose sanctions on executives are not final from the outset and may be appealed.
The call
Appeals may be lodged against judgements handed down by the commercial courts or the courts of first instance concerning liability for insufficient assets or professional sanctions (personal bankruptcy, management ban).. The public prosecutor has his own right of appeal.. An appeal against a decision ordering personal bankruptcy or a management ban has suspensive effect.This means that the penalty does not take effect until the Court of Appeal has given its ruling.
The judgments of the criminal courts ruling on bankruptcy and related offences may also be appealed to the criminal appeals division of the competent court of appeal, in accordance with the rules of criminal procedure.
Appeal to the Supreme Court
Decisions handed down by the Courts of Appeal can then be appealed to the Supreme Court, both in civil (for asset and professional sanctions) and criminal (for bankruptcy) cases, in order to ensure that the law is correctly applied by the lower courts.
Rehabilitation and increase in professional sanctions (article L. 653-11 of the French Commercial Code)
Even where personal bankruptcy or a management ban has been imposed, it is not necessarily definitive for the full period set by the judgment. The law provides for the possibility of a "second chance".
The recovery procedure
The person concerned may, at any time, apply to the court that imposed the penalty to be relieved, in whole or in part, of the penalty.. The application must be made by request, and must be accompanied by the relevant supporting documents. The court shall rule after hearing the claimant and obtaining the opinion of the public prosecutor..
The conditions for recovery
Article L. 653-11 sets out two alternative conditions:
- The applicant must have brought a sufficient contribution to the payment of liabilities. It is up to the court of first instance to determine whether the amount is "sufficient". It is not just a question of the amount: the efforts made, the actual ability to contribute, and even the initial share of responsibility for the liabilities, can all be taken into account.
- OrIn the case of a request for a management ban (under article L. 653-8), the applicant must submit the following documents guarantees demonstrating the ability to direct or control a company again. These guarantees can be varied, such as professional training, for example.
Effects of the increase
If the court grants full relief from the disqualifications and prohibitions, its decision entails rehabilitation of the person concerned. The sanction ends early.
Navigating the procedural maze of sanctions against directors requires a certain amount of legal expertise. Whether you are the target of an action for insufficient assets, personal bankruptcy or bankruptcy proceedings, understanding the applicable rules and deadlines is fundamental to organising your defence. The possibilities for recourse and rehabilitation exist but are limited. Support from a lawyer with expertise in insolvency law can be decisive in safeguarding your rights and assessing the best strategies to adopt.
For a personalised analysis of your situation or to assist you with sanction proceedings, our team is at your disposal.
Sources
- Commercial Code: Articles L. 651-3, L. 653-1, L. 653-11, L. 654-16 to L. 654-20
- French Commercial Code: articles R. 651-1 to R. 651-6, R. 653-1 to R. 653-4
- Code of Criminal Procedure (provisions relating to public and civil proceedings, statute of limitations, appeals)
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