Bankruptcy and related offences: the criminal penalties that threaten managers

Unfortunately, a company's economic difficulties can extend beyond the commercial and financial sphere into the criminal sphere. When risky or even fraudulent management is suspected of having precipitated the company's downfall, the director is exposed to particularly severe penalties. In addition to the civil and professional penalties which may exclude them from business life or affect their assets, such as the liability for insufficiency of assetsUnder criminal law, there are specific offences, the most emblematic of which is bankruptcy. This term, which is steeped in history and synonymous with fraudulent bankruptcy, now covers a number of specific acts which, if proven, can land the manager in court. Understanding what bankruptcy is, what acts can constitute it and what penalties are incurred is essential for any manager wishing to navigate the murky waters of business difficulties. This article sets out these crucial aspects in detail, as well as the so-called 'related' offences that can also give rise to criminal liability. For an overview of the various penalties, see our summary article  

What is bankruptcy?

Bankruptcy is not just bankruptcy. It is a criminal offence which punishes specific fraudulent behaviour committed by certain economic players within the strict framework of a legal redress or compulsory liquidation. The aim is no longer, as in the past, to punish simple negligence, but rather to punish dishonesty or serious mismanagement of a criminal nature.. The law has abandoned the old distinctions between simple and fraudulent bankruptcy and adopted a unified definition covering several types of conduct. It is important to note that the safeguard procedure, designed to deal with difficulties before the cessation of payments, is not affected by the offence of bankruptcy..  

What are the preconditions for an offence?

For bankruptcy proceedings to be brought, two fundamental conditions must be met.

Persons liable to penalties (art. L. 654-1)

The scope of bankruptcy has broadened with each reform, and now covers a fairly wide range of economic players. The following may be prosecuted :  

• Self-employed individuals: This includes shopkeepers, craftsmen, farmers and self-employed professionals, including the self-employed (subject to exceptions linked to specific disciplinary rules). The status (trader, craftsman, etc.) must be assessed at the time of the alleged offence. The absence of registration is not an obstacle if the activity is proven. A trader's spouse is covered only if he or she carries on a separate commercial activity. The new individual entrepreneur created by the 2022 law is also affected.  
• Directors of legal entities governed by private law : this applies to any person who, directly or indirectly in law or in factor managed or wound up the legal entity.
  • The directors by right are those designated by the company's articles of association or corporate bodies (manager, chairman, managing director, director, etc.). They may be held liable even if they were not remunerated or if they claim to have acted merely as a figurehead.  
  • The de facto directors are those who, without an official title, act as true masters of the business, exercising a management activity with complete independence. Their identification is a matter for the sovereign judgement of the criminal court, which is not bound by the qualifications adopted by the commercial court. A former director may be classified as a de facto director if he retains significant decision-making power.  
• Permanent representatives of managing legal entities: a natural person appointed to represent a company that is itself the director of another company may be prosecuted.  
• The legal entities themselves: Since the introduction of general criminal liability for legal entities, a company can be found guilty of bankruptcy if the offence was committed by its organs or representatives, on its behalf. In practice, this mainly concerns cases of complicity, for example in the case of a banking institution.  

Initiation of receivership or compulsory liquidation proceedings (art. L. 654-2)

This is a condition absolutely necessary. Without a judgment opening one of these two collective proceedings, bankruptcy proceedings are not possible.. The mere cessation of payments is not enough. This requirement reflects the dependence of criminal law on commercial proceedings. However, since the public prosecutor can request the opening of collective proceedings, he can provoke this precondition..  

The opening of the procedure necessarily implies a suspension of paymentsdefined by the French Commercial Code as the debtor's inability to meet its current liabilities with its available assets.. If the criminal court has to make a finding of this kind, it retains a right of appeal. autonomy to appreciate the date. It is not strictly bound by the date set by the commercial opening judgment, even though it often refers to it.. This autonomy, although criticised for the legal uncertainty it creates, makes it possible to punish acts that might have escaped classification if only the commercial date, sometimes provisionally fixed, had been used..  

What constitutes bankruptcy (art. L. 654-2)?

Article L. 654-2 of the French Commercial Code sets out an exhaustive list of five categories of conduct that may constitute the offence of bankruptcy. It is essential to note that bankruptcy is an offence against the law. intentional crime. Mere negligence or mismanagement is not enough; there must be an intention to commit the reprehensible act, even if this intention can often be deduced from the material facts..  

1° Purchases for resale at a loss / Use of ruinous means

This case concerns desperate manoeuvres to obtain liquidity in order to avoid or artificially delay filing for bankruptcy.. Two types of behaviour are targeted:  

• Purchases made with a view to resale below the market price: the intention, from the time of purchase, to resell at a loss in order to conceal the situation must be proven. Actual resale below the market price must be established, but not necessarily at a loss.  
• Having used ruinous means to obtain funds: the "ruinous" character is assessed in relation to the company's situation and the conditions for obtaining the funds. Typical examples include :
  • Excessive use of bank credit (large overdrafts, expensive loans) when the situation is already compromised.  
  • The discounting of bills of convenience (drafts not caused) or false invoices, generating significant financial costs.  
  • Systematically issuing bounced cheques.  

However, the means must be truly "ruinous". A simple loan, even in a state of suspension of payments, is not enough.. A free loan cannot be described as ruinous.  

2° Embezzlement or concealment of all or part of the assets

This is undoubtedly the most frequent and most characteristic case of fraud.. This is any voluntary act aimed at removing an asset of the debtor from the pledge of creditors..  

• Embezzlement : positive act of fraudulent disposal. Examples:
  • Sale of a company asset at an undervalued price or to a fictitious company.  
  • Excessive or unjustified personal deductions by the executive.  
  • Undue payments (repayment of undeclared current accounts, payment of personal debts from social security funds).  
  • Excessive or fictitious remuneration.  
  • Transfer of contracts or customers to another structure controlled by the manager.  
  • Note: a preferential payment by a creditor is not a misappropriation (it may be covered by another sanction), except in special cases such as fraudulent dation in payment. Case law also distinguishes this case from abuse of corporate assets (ABS): personal interest is not required for bankruptcy by misappropriation, and the justification based on the group's interest is rejected in bankruptcy cases.  
• Concealment : an act intended to conceal the existence or location of property. Examples:
  • Hiding goods or equipment on a third party's premises.  
  • Failure to declare certain assets to the procedural bodies.  
  • Refusing to communicate essential intangible elements (software source codes, for example).  

Le moment of misappropriation or concealment is debated. Although Article L. 654-2 does not specify this, the prevailing case law considers that the offence is constituted even if the facts are previous the cessation of payments, if they continue thereafter or if they result from the same fraudulent intent to affect available assets.  

3° Fraudulent increase in liabilities

Less frequent, this case aims to artificially reduce net assets by inflating debts.. Examples :  

• Acknowledgement of fictitious debts.  
• Issuing false invoices.  
• Deliberate non-payment of tax or social security contributions to conceal the true situation and worsen liabilities. The Court of Cassation recently validated this approach for the deliberate non-payment of URSSAF contributions.  

It is not a question of penalising the mere accumulation of debts resulting from the continuation of the business. For example, the fact of not making employees redundant or not terminating a commercial lease, even if this increases liabilities, does not in itself constitute an increase in liabilities. fraudulent.  

4° and 5° Serious accounting irregularities

Keeping regular and accurate accounts is a fundamental obligation. A serious breach of this obligation may constitute bankruptcy. There are two levels of severity:  

• 4° Fictitious bookkeeping, disappearance of accounting documents, or total absence of compulsory bookkeeping:
  • Shadow accounting : Existence of double accounting, or official accounting riddled with omissions and false entries making it totally unrealistic. For example, recording trade receivables 10 times higher than they actually are.  
  • Disappearance of accounting documents : Deliberate destruction, concealment or prolonged refusal to hand over essential accounting documents to the procedural bodies.  
  • No accounting at all : Complete lack of chronological recording, inventory, etc., where required by law. The mere absence of a few documents is not sufficient.  
• 5° Keeping of accounts that are manifestly incomplete or irregular in the light of legal provisions : Introduced in 1994 to cover cases where accounts exist but show glaring gaps or irregularities, without reaching the level of fiction or total absence. The adverb "manifestly" implies that only serious and obvious irregularities are covered. The assessment is made in concreto.  

For these accounting offences, it is irrelevant whether the facts (lack of record-keeping, irregularities) occurred before or after the cessation of payments..  

What are the penalties for bankruptcy?

As bankruptcy is an offence, its perpetrators and accomplices are liable to criminal penalties (principal and additional penalties) imposed by the criminal court.

Principal penalties

• Natural persons (Art. L. 654-3) : The maximum penalty is five years' imprisonment and a €75,000 fine. The judge sets the quantum according to the seriousness of the offence and the personality of the offender. A custodial sentence must be specially justified and should be used only as a last resort.  
• Aggravation (Art. L. 654-4) : If the perpetrator or accomplice is a manager of an investment services provider, the penalties are increased to seven years' imprisonment and a €100,000 fine.  
• Legal entities (Art. L. 654-7) : The maximum fine is five times the fine for individuals, i.e. 375 000 € (or €500,000 for ISPs). Other penalties are possible under article 131-39 of the Criminal Code (dissolution, ban on activity, etc.).  

Additional penalties (individuals - Art. L. 654-5)

The court may also impose one or more additional penalties:  

• Disqualification from civic, civil and family rights (right to vote, stand for election, guardianship, etc.) for up to 5 years.  
• Disqualification from holding a public office or the professional or social activity concerned by the offence, for a maximum of 5 years. Please note that if a civil or commercial court has already imposed a similar measure (personal bankruptcy, management ban), this professional ban may no longer be imposed by the criminal court for the same acts following a decision by the Constitutional Council (QPC of 29 Sept. 2016).  
• Exclusion from public contracts for a maximum of 5 years.  
• Ban on issuing cheques (except for withdrawals or certified cheques) for up to 5 years.  
• Display or dissemination of the conviction.  

The complicity

An accomplice to bankruptcy (a person who knowingly aids or assists the principal perpetrator) is liable to the same penalties as the perpetrator.This is the case even if he does not personally meet the conditions for being the principal author (he is neither a trader nor a manager, etc.).. Complicity is frequently sought, particularly with company partners such as bankers (for granting ruinous loans with full knowledge of the facts). ), accountants (for irregular bookkeeping ) or lawyers (for aiding concealment of assets ).  

Related offences: other criminal offences to be aware of

In addition to bankruptcy, the French Commercial Code punishes other criminally punishable conduct committed in connection with insolvency proceedings. These "related offences" are designed to ensure compliance with the rules of procedure..  

Offences under articles L. 654-8, L. 654-9, L. 654-10

These texts punish various acts:

• Irregular acts of disposal (Art. L. 654-8) : The fact that the director (or individual debtor) carries out an act of disposal (sale of an asset, etc.) without the authorisation of the official receiver during the observation period, or pays a debt prior to the opening judgment. Violating the terms of the plan (payment outside the payment schedule, disposal of an asset declared inalienable under the plan) is also punishable. A third party who knowingly enters into an irregular agreement with the debtor or receives an undue payment is also liable to punishment. The penalty is 2 years' imprisonment and a €30,000 fine.  
• Misappropriation, concealment or concealment of assets by a third party (Art. L. 654-9) : Targets anyone who, in the interest of the debtor, removes, conceals or hides company assets. Fraudulent declaration of fictitious debts, or carrying on business under an assumed name while committing certain fraudulent acts are also punishable. The penalties are the same as for bankruptcy.  
• Offences committed by close relations (Art. L. 654-10) : Penalties apply to the debtor's spouse, ascendants, descendants, collaterals or relatives who embezzle, misappropriate or conceal assets. The penalties are the same as for breach of trust (currently 5 years and €375,000).  
• Reinstatement of assets (Art. L. 654-11) : The court may order the restitution of property fraudulently taken.  

Offence of embezzlement (Art. L. 654-12)

This serious offence specifically targets bodies involved in collective proceedings (administrator, court-appointed agent, liquidator, commissioner for the implementation of the plan, etc.). It punishes :  

• Deliberately harming the interests of creditors or the debtor (using funds received for oneself, receiving undue benefits).  
• Use its powers contrary to the interests of the creditors and the debtor, in its own interest.  
• Acquire, directly or indirectly, the debtor's assets or use them for the debtor's benefit (this also applies to any person who has participated in the proceedings, with the exception of employee representatives). The acquisition may be declared null and void.  

The penalties are five years' imprisonment and a €75,000 fine.  

Other offences (Art. L. 654-13, L. 654-14, L. 654-15)

• Preferential payment by a creditor (Art. L. 654-13) : A creditor who, after the opening judgment and with knowledge of the situation, receives an irregular payment from the debtor. Penalty: 2 years / €30,000.  
• Miscellaneous actions taken by the debtor (Art. L. 654-14) : Withdrawing part of one's assets from prosecution in bad faith; not paying the debts for which one is liable (following a conviction for insufficient assets, for example); organising one's insolvency in order to escape a pecuniary sentence (link with the general offence of organising insolvency under art. 314-7 C. Pén.). Penalties: those for bankruptcy.  
• Violation of a management ban (Art. L. 654-15) : Carrying out a professional activity or functions in breach of a ban (personal bankruptcy or management ban). Penalty: 2 years / €375,000.  

Special rules of procedure

The prosecution of criminal offences related to business difficulties is subject to certain conditions specific procedural rules defined in articles L. 654-16 et seq. of the French Commercial Code, which supplement the Code of Criminal Procedure.  

In short, the prescription of public action for acts of bankruptcy committed before the opening judgment only begins to run from the date of that judgment. As long as no collective proceedings have been initiated, the time limit (currently 6 years for misdemeanours) does not run.. Le public prosecutor plays a key role, being able to request all documents from the bodies involved in the procedure. L'civil action for damages suffered by the group of creditors may be brought by the liquidator or administrator, or by the public prosecutor. Finally, the sentences for bankruptcy or related offences are subject to compulsory publication.  

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Criminal law relating to companies in difficulty is complex, and the consequences of a conviction can be very serious for a company director. If you are facing difficulties or if you anticipate risks linked to the past management of your company, advice tailored to your situation could help you avoid serious criminal consequences. Contact us for a specialised legal assistance and defend your rights against these risks.

Sources

• Commercial Code, articles L. 654-1 to L. 654-20 (Bankruptcy and other offences)
• Commercial Code, articles L. 631-1 (Suspension of payments)
• Penal Code, articles 121-3 (Intention), 121-6, 121-7 (Complicity), 131-39 (Penalties MP), 314-1 (Breach of trust), 314-7 (Organisation of insolvency)